Avax Apparels BSE SME IPO review (Avoid)

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Review By Dilip Davda on September 17, 2024

•    The company is engaged in wholesale trading and online retailing of silver ornaments.
•    It is entering in to manufacturing of knitted cloth in near term.
•    It is operating in a highly competitive and fragmented segment.
•    Though the IPO appears lucratively priced based on FY24 super earnings, it is a "High Risk/Low Return" bet. 
•    There is no harm in skipping such risky issues.

PREFACE:
The primary market is really wondering and surprised over approval of such a tiny IPO which will have a paid-up equity capital of Rs. 1.04 cr. and a market cap of Rs. 7.27 cr. post IPO. Recently we witnessed action of regulator that forced BSE to withhold the IPO process for Archit Nuwood and listing of Trafiksol. Market men expects the hat trick of action with some action in regard to this IPO. Let us wait and watch.

ABOUT COMPANY:
Avax Apparels & Ornaments Ltd. (AAOL) is engaged in two lines of business i.e. wholesale trading and online retail of silver ornaments. The Company operates in the wholesale trading of knitted cloth. They directly buy from manufacturers and supply wholesale to companies and readymade garment manufacturers in Punjab. The company specializes in knitted cloth, which are used for manufacturing of ladies and gents' jackets. The company's key advantages in wholesale trading include a geographical advantage, being located in the hub of cloth manufacturing. 

The company has recently purchased machinery for manufacturing of knitted cloth. The Company is going to start manufacturing very soon, a step towards backward integration. It aims to manufacture what it has been outsourcing till now. This would increase profit margins going forward. Also it expects, this would allow it to get work which has less credit period involved thereby reducing high working capital requirements.

The Company also operates in the business of online retail of silver ornaments. They offer a wide range of designs and articles with a choice of weight of products, such as silver rings, silver ladies pajeb, silver gents kada, silver plate set, silver glass, silver bangles, silver bowls, silver chains, and other silver jewellery. They are capable of supplying in all major cities across the country. The company's key advantages in this business include operating in the affordable silver ornaments sector, an increase in demand for silver ornaments in Indian markets, the ability to replicate gold jewellery designs in silver, and access to exclusive Punjabi ethnic designs. As of the date of filing this offer document, it had 7 employees on its payroll.

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with a maiden IPO of 274000 equity shares of Rs. 10 each at a fixed price of Rs. 70 per share to mobilize Rs. 1.92 cr. The issue opens for subscription on September 20, 2024, and will close on September 24 2024. The minimum application to be made is for 2000 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE SME. The issue constitutes 26.36% of the post-IPO paid up equity capital of the company. The company is spending Rs. 0.20 cr. and from the net proceeds, it will utilize Rs. 1.50 cr. for working capital, Rs. and Rs. 0.22 cr. for general corporate purposes. 

The issue is solely lead managed by SKI Capital Services Ltd., and Skyline Financial Services Pvt. Ltd. Is the registrar to the issue, while SKI Capital Services Ltd. is also the market maker for the company. 

Having issued initial equity shares at par value, the company issued further equity shares in the price range of Rs. 70 - Rs. 490 per share (based on Rs. 10 FV) between March 2012 and December 2022. It has also issued bonus shares in the ration of 47 for 1 in November 2022. The average cost of acquisition of shares by the promoters Rs. 20.76 per share. 

Post-IPO, company's current paid-up equity capital of Rs. 0.77 cr. will stand enhanced to Rs. 1.04 cr. Based on the IPO pricing, the company is looking for a market cap of Rs. 7.27 cr.

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, the company has posted a total income/net profit of Rs. 0.29 cr. / Rs. 0.01 cr. (FY22), Rs. 14.70 cr. / Rs. 0.69 cr. (FY23), and Rs. 22.06 cr. / Rs. 1.38 cr. (FY24). 

For the last three fiscals, the company has posted an average EPS of 12.21 and an average RoNW of 45.29%. The issue is priced at a P/BV of 1.70 based on its NAV of Rs. 41.13 as of March 31, 2024, and at a P/BV of 1.44 based on its posts-IPO NAV of Rs. 48.74 per share. 

If we attribute FY24 earnings to its post-IPO fully diluted paid-up capital, then the asking price is at a P/E of 5.26. Based on FY23 earnings, the issue is at a P/E of 29.05. The issue relatively appears lucratively priced considering FY24 earnings. 

For the reported periods, the company has posted PAT margins of 3.51% (FY22), 4.72% (FY23), 6.26% (FY24), and RoCE margins of 3.20%, 40.45%, 37.50% respectively for the referred periods.

DIVIDEND POLICY:
The company has not declared any dividends in any financial year. It will adopt a prudent dividend policy based on its financial performance and future prospects. 

COMPARISION WITH LISTED PEERS:
As per the offer document, the company has shown Anand Rayons, and Aarnav Fashions as their listed peers. They are trading at a P/E of 20.9, and 33.6 (as of September 17, 2024). However, they are not truly comparable on an apple-to-apple basis.  

MERCHANT BANKER'S TRACK RECORD:
This is the 2nd mandate from SKI Capital in the ongoing fiscal. The only listing that took place so far opened at a premium of 28% on the listing date.

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